Know the essentials: Business car loans
A work vehicle is crucial in some occupations but more of a luxury in others, here’s a guide to what you should think about when deciding on business car finance.
If you’re unsure whether a business car is necessary, consider all the costs, factoring in essentials such as petrol, maintenance and insurance to see how it will impact your bottom line.
If you are confident it will drive your business forward, it may be a worthy investment. Here are the top things to consider when finding finance for a business vehicle.
Speak to a registered tax agent or consult the ATO to confirm any tax-related information in this article.
Five things to consider when purchasing a car for business use
What is a business car loan?
A business car loan is one form of business finance that is used to purchase or lease a vehicle for your company. With most car loans in Australia, the vehicle is used as security for the loan, and terms typically range from one to five years.
As with other forms of business finance, there are several types of car loans available; it’s important to know the differences so you can make the best, most informed choice.
The lender will need to see evidence of your business income and trading history so that they can see that you have the capacity to meet your loan repayments.
In cases where the loan is secured by the vehicle, the lending criteria can be more relaxed and interest rates lower, making business car finance more accessible to many small business owners.
What will you primarily use the car for?
If the vehicle will be used for business purposes at least 51% of the time, you are eligible to apply for a business car loan.
If you are planning to use the car solely for work purposes and to get from A to B on the weekends, it makes sense to get a business loan rather than a personal loan.
However, because business vehicles are eligible for tax deductions in Australia they cannot be used for more out-of-office activities than professional duties.
Which business can use business car finance?
All types of businesses across all industries can use car finance; companies use it to finance everything from a single car to a fleet of necessary vehicles.
- Mobile Mechanics
- Pool Servicing
- Real Estate Agents
What type of vehicle should you purchase?
It’s important to look at why the business is purchasing this asset to figure out what type of vehicle would fit the business needs.
If you need a car for short trips to deliver documents or get to meetings with clients, a more compact car which is cheaper to run and easier to park may be the better option.
If you’re a tradesperson or need a lot of equipment to carry out your job, a ute or van may make more sense.
What age vehicle should I be looking for?
The age of the vehicle is also an important consideration as this typically influences the interest rate of the loan. Brand new vehicles tend to attract the lowest interest rate and older vehicles, the highest.
Look at how long you intend to keep the business car and how much it will be used, A good rule of thumb is if it will be a long term asset – longer than the loan term – then it makes sense to buy a vehicle early on in its lifespan with a high residual value.
But if the car will only be used occasionally and won’t gather much wear and tear, a second-hand car may be a better option. Keep in mind; you may not be able to use second-hand vehicles as security for a loan.
Options for business vehicle finance
Finance lease – This involves a lender purchasing the vehicle and renting it for an agreed period.
The monthly payments are calculated by taking the cost of the car – excluding GST, the term of the lease, the interest rate and any other fees – into account. Flexible payment plans are sometimes offered to match budgets.
Your business has the use of a commercial vehicle and all the benefits of ownership, but the lender retains the vehicle ownership. Some finance lease contracts offer the option to purchase the vehicle at the end of the term, trade it in or look to refinance the lease.
Operating lease – This is the same as a finance lease, but operating expenses, like maintenance, are covered in the lease. Generally, you return the vehicle at the end of the agreement.
Commercial hire purchase – This is a type of rental agreement. The difference between a finance lease and hire purchase is that ownership is transferred to you when all repayments have been made.
In the case of hire purchase, the lender purchases the equipment on your behalf, and you pay instalments to buy it from them. A repayment plan is set up and must be adhered to until the full cost of the item has been repaid. The equipment still acts as collateral if you fail to meet the repayments.
Chattel mortgage – A chattel mortgage is a type of finance where an item of movable personal property acts as security for a loan.
A financial institution will lend you the money to purchase the vehicle, you take ownership of the vehicle immediately, but the lender takes out a mortgage over the vehicle as security.
The financier still holds an ownership interest in it, similar to a traditional loan. Once the loan term is over, the lender will remove the mortgage.
Novated lease – A novated lease is an agreement between an employer, employee and a lender. The employee enters into a car lease with the lender allowing employers to offer the benefit of a company car without incurring any risk.
This is a form of salary sacrifice. Employers set up a finance option for employees where a portion of their pre-tax income is taken to cover the vehicle’s finance and running costs.
Not every employer supports novated leasing, and the employee will generally need to stay employed throughout the lease period.
Business loan – A standard business loan can be used to purchase a vehicle, including term loans and line of credit.
Car loan – A regular car loan may be available to business but will not have the tax benefits of other business vehicle finance options.
What to compare when looking at business vehicle finance
Interest rates – Search for a financial institution that offers a competitive rate suitable to your needs.
Fees – Confirm what fees are expected from you, including upfront fees, early termination fees, late payment fees etc.
The full amount you can borrow – factors like income, credit reports, and the type of vehicle can affect the amount a lender will offer you. Comparing different financial institutions can help you to find a lender that will offer what you need.
Tips to help you get the most out of your vehicle finance
- Talk with your accountant before applying. The multiple options of business car finance can be confusing when it comes to tax implications. Accountants can help you to decide which one will work best for you.
- Discuss repayment flexibility with the lender. Certain lenders can offer weekly, monthly, half-yearly or even annual repayments to fit them around your cash flow. If you need a flexible repayment schedule, enquire about this before committing to anything.
- Use a car loan calculator – Calculators can help you to understand how much your repayments will be on the amount you are borrowing and are generally easy to use and understand.
- Always keep your current financial situation in mind when looking for a car loan. Check your credit score and determine what type of vehicle you need and can realistically afford before comparing your options.
Comparing different options to finance your car can ensure that you get the best deal for your individual situation.
Biz Loan Comparison can help you secure the right loan by taking your unique business needs into account and allowing you to compare loans from some of the best lenders currently on the market.
Seeing industry-leading loans side by side in our easy-to-use comparison tool helps you choose the best one for you: the loan that fits right into your business vision.
Still have questions? Let’s talk
Confused? Not sure if this applies to your situation? Phone us on 1300 190 429 for some free, no obligation advice.
Or want to compare business loans now?
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